Sunday, September 25, 2005

Deep Impact - Google collide with Baidu in Chinese Market (2)

Using own strength to attack enemy's weakness

Simply comparing Baidu and Google, the difference in quality of search technology is clear. Google's technological strength is above Baidu's. However, Baidu's sharp focus on Chinese search is also hard for Google to catch up in a short time. More critically, their understanding of the search habits of Chinese users are very different.

There are over 100 million internet users in China, second only to the US. But this is a very different market than the one in the US. The Research Center from the Chinese Academy of Social Development published a survey result of "Questionaire on the usage of internet and it's social impact" recently. They found that the most visited area by net surfers is in the news. General browsing came the second. Games, music downloading, finding entertainment information makes up for the top five. At the same time, most of the news they are looking at are also related to entertainment, then local news followed by international news. Besides surfing, as high as 62.2% of internet users play games online, second only to news reading and general browsing. This ratio is much higher than that in the developed countries such as US, Britain, and Germany, etc.

In the US and Britain, the major task to go online is to check emails for over 90% of the internet users. The survey found less than half (44.8%) of Chinese internet users check their emails regularly. This at least indicates that Chinese users access internet as an entertainment medium instead of as an commercial channel. So the search needs of users are very different from that of the US.

Understandably, for many Baidu users, searching for free MP3 files are their most favorite service. But as Baidu's fame went up with it's IPO, this advantage is dissipating quickly. According to a lawyer from international music group EMI, there are five companies have brought lawsuits against Baidu during this summer. A Beijing court has ordered Baidu to halt its music downloading service last week though Baidu has claimed that It never offered downloading service besides search and would appeal the decision. Clearly, the free lunch could be over soon and instead Baidu would have to pay for the service.

There were some rumor came out last week that Baidu has admitted that they reached agreement with international and domestic music organizations. In that agreement, Baidu will point all search results of downloading service to legitimate sites begining October. And Baidu will try to gradually remove all the illegitimate sites in six months. Then Baidu will negotiate with all music rights owners and download service provider to share the revenues. Some estimates that, from downloading music tones alone, Baidu could earn $2.5 million each year. However, that might not be true. Other news report indicated that last week's meeting sponsored by Baidu was basically boycotted by the major players in the music industry.

For Baidu, this could be a two edged-sword. "If all Baidu search point to fee-based adresses, it will reduce the traffic dramatically", One industry analyst explained. Xiaoqun Sun, who is in charge of Google's strategic partnership and business development, mentioned the same problem on Sept. 3 on a meeting cosponsored with China Enterprise. In the global scale, Google provides 53% of all the searches. However in Chinese market, Baidu is the largest search engine. Because copyright concerns, Google does not provide MP3 service while Baidu does. So, if MP3 service is excluded, Google is also number one in the Chinese market. "As Google starts it's research and development center in China, Google will provide new products spcifically designed for Chinese users", said Sun. is an example.

But in Yanhong Li's eyes, Google's new products do not have advantages in China at all. "In China, net citizens have their own communities. They think they belong to certain communities. When net users search information, they will naturally choose Baidu. It is not only because Baidu is the biggest Chinese search engine, but also because they can find many people who share the same interests." In Dec. 2003, Baidu started the "poster cafe" bulletin board services. "They can ask questions, exchange experiences, and they feel like at where they belong. It is a very efficient supplement to traditional search services." Li thinks it has become a major competitive edge for Baidu. In June, Baidu started another community service - "Baidu Knows". A place questions can be asked and answered. Person that gives a good answer earns points that can be accumulated. "The service looks very promising."

"Even Google is a very powerful company, it still can't achieve a market share in the 70-80% range. In contrary, Yahoo still have chance to beat them." Faced with Google's quick moves in China, Li is not that much concerned. "Yahoo entered China in 1998. After trials of so many years, they are still not number one in China. In fact, after they bought 3721 net, they have spent much more on purchasing servers and broadband than Baidu. But in the same period, Baidu's market share have not dropped, but actually gone up."

"To enter China, for a multinational giant such as Google, I can't predict exactly how many years it would take for them to learn. The hurdles lying in front of them may not be that small as they have imagined. It's not that easy!" Li smiled very confidently.

According to estimate, the search market in China reached $120 million last year. This year it probably will reach $210 million. By 2006, it could reach $320 million. The annual growth rate could be around 80%. Anyway, in this high growth, intensely competitive market, Baidu faces tremendous pressure. Currently, Baidu's stock has fallen back to around $80 per share after gained unbelievable 354% on the IPO debut. But it is still 2000 times of Baidu's net profit. To support this high stock price, Baidu can do absolutely nothing wrong.

translated from an article on with minor modifications by Hua Tong.


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